Economics

Kerrisdale Capital Short Eastman Kodak Company (KODK)

We are short shares of Eastman Kodak Company (“Kodak”, NYSE: KODK), a 138-year old commercial printing and imaging company whose stock has more than doubled since announcing a blockchain and cryptocurrency licensing partnership.

Fittingly for a long-time provider of motion picture film products, Kodak’s sudden rise resembles something out of the movies. A dying relic of American manufacturing licenses its brand to a blockchain project and immediately creates over $300m of value. Along the way Kodak board members conveniently grant themselves shares the day before the announcement, a stock promoter with a checkered past is engaged for PR, and a group of German copyright trolls reinvent themselves as blockchain-enabled image platform managers.

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Kerrisdale Capital Short Eastman Kodak Company (KODK)

Blockchain and cryptocurrencies are exciting technologies with the potential to disrupt many industries; their use in media rights licensing by KODAKOne will not be one of them. The use of blockchain in operating an image copyright platform accomplishes nothing. KODAKOne intends to utilize smart contracts and a crypto-asset to solve the problem of copyright infringement, but the business idea is flat-out silly. Cryptographically hashing an image into a blockchain doesn’t prove the provenance of intellectual property, a blockchain does not reduce the resources necessary for copyright enforcement, no photographer would rather be paid in KODAKCoins over real money, etc. KODAKOne is little more than a moribund company’s hollow attempt to chase the ICO craze. It’s a PR stunt – a distraction that will pass when the company reports earnings and reminds investors of its distressed financial position.

Unsurprisingly for such a nonsensical business concept, the team behind KODAKCoin has zero credibility. The chairman and founder of a key firm behind the ICO is a stock promoter who was previously banned from a Canadian stock exchange. KODAKOne’s executive team is unknown within the blockchain developer community. KODAKCoin is not a serious attempt to apply new technology to a real problem – it’s a last-ditch stock promotion gambit for a company hurtling towards bankruptcy.

Kodak faces significant debt maturities, tightening liquidity, and restrictive debt covenants while financials are in free fall. The company is a sub-scale player in a highly competitive, secularly declining industry. Management has repeatedly failed to stem negative free cash flow and botched long promised asset sales. The situation is grim and these same set of circumstances bankrupted the company 6 years ago. Kodak doesn’t have the luxury of hoping startup blockchain projects succeed – it’s staring at the possibility of default and a debt restructuring in the next 12-18 months. Potential ICO proceeds and royalty payments from KODAKOne do not change the high probability of these events. Rather than dreaming of a “new economy” for photographers, shareholders should be concerned about an eventual wipe-out. We view the equity as worthless, implying downside of -100%.

I. Research Highlights

KODAKOne is a Flawed Concept that Will Never Deliver Promised Benefits

  • The application of blockchain technology in IP management is not a novel solution to an “unsolvable problem.”1 Management claims that blockchain will: 1) fix the problem of proving IP ownership, 2) cause “all the costs from complicated and expensive royalty accounting [to] cease to exist”2 and, 3) enable a new cryptocurrency that is “all about paying photographers fairly.” This is all unsubstantiated hype designed to entice investors.
  • In the words of an IT director and author of several blockchain-related blogs, “They are claiming to photographers that they will magically enforce their copyright and cause money to rain down upon you, but there’s no detail how that would or could happen in a way that it doesn’t already.”
  • Descriptions of an “encrypted, digital ledger,” and “AI-enabled image recognition” are just buzzwords – there is no practical advantage to using blockchain for an image rights management platform, and even less for a “photo-centric” cryptocurrency.
  • Cryptographic hashing will not prove the provenance of IP and using blockchain does not diminish the resources necessary for infringement detection and enforcement.
  • There is no reason for a new cryptocurrency except as a transparent attempt to capitalize on speculative mania.
  • The KODAKCoin ICO is only being offered to “accredited investors.” Unless photographers meet the necessary financial qualifications, they will not be able to participate in the ICO. Rather than “democratizing photography,” KODAKCoin faces a slew of restrictions that greatly hinder its adoption as a means of exchange.
  • These technological and legal problems will render the platform unworkable. As a blockchain expert we spoke with put it, “When the mania goes, this will go with it, and what will be left will be a dry husk of a software application that will never do what it was marketed to do.”

Board Members Have Engaged in Highly Suspicious Trading, Company Faces Risk of SEC Investigation

  • On January 8, 2018, exactly one day before Kodak announced its “Major Blockchain Initiative and Cryptocurrency,” five board members awarded themselves 370,974 restricted stock units.3
  • We carefully reviewed relevant publicly available documents with two experts: a senior partner at a highly-ranked global law firm, with 25 years of experience in securities law, including experience defending company directors, and a former senior counsel in the Enforcement Division of the SEC with 13 years of experience planning and conducting investigations into potential violations.
  • The former SEC Enforcement Division lawyer stated, “If I was thinking about buying the company’s stock, I would be worried about an SEC investigation lowering its value, I think it’s a legitimate concern for the company or for anyone that is considering being an investor of the company.”
  • Both lawyers thought the transactions “look[ed] bad,” found irregularities and inconsistencies in Kodak’s Form 4 filings, and believed the company has a non-trivial probability of drawing an SEC inquiry.
  • Neither found sufficient documentation to negate the assumption that the transactions were done on the basis of material, non-public information. The transactions suggest board members personally benefited from information that properly belonged to the company – a violation of their fiduciary duty.

The KODAKCoin Team has Zero Credibility

  • AppCoin, a 7-month old ICO marketing and PR services firm hired by WENN Digital to facilitate and market the KODAKCoin ICO, is led by Cameron Chell, a stock promoter and motivational speaker with a history that includes: 1) being banned from a Canadian exchange for the improper sale of securities, 2) being a known associate and business partner of a convicted perpetrator of securities fraud which resulted in the indictment of 58 people, 3) being forced to step down as CEO of the tech incubator he founded, only to be replaced by someone arrested 5 months later for running a boiler room telemarketing scam, and 4) having a second board member at his tech company sued for pumping and dumping penny stocks before eventually serving jail time for impeding the IRS.4 Chell’s track record is atrocious. Two of the public companies that Chell is often cited for helping found and develop, Slyce and UrtheCast, have been failures (until they were rescued and bought out).5
  • AppCoin is deeply intertwined financially and operationally with WENN Digital and the planned KODAKCoin ICO. AppCoin has only 2 executive officers and zero employees.6 Below is a recent photograph of AppCoin’s stated business address. Based on property records, it appears to be the back entrance of a private home owned by Chell:7
  • WENN Digital purports to have “deep expertise” in “proprietary blockchain development,” “big data,” and “AI-enabled image recognition” and yet is so primitive that it had to receive a $100k, 7% bridge loan from AppCoin last November.9
  • A highly-regarded, well-connected blockchain developer with over 20k Twitter followers, and named by Fortune magazine as one of the top accounts to follow on Twitter for his insights on cryptocurrency, had this to say about the KODAKCoin ICO and its developers:

No one I know who is reputable – nobody – has said anything good about this scheme. These are people not necessarily who are skeptics; these are people who work on Lightning, and people who work on Bitcoin, and people who are really tight with the whole Ethereum crew, so these are people who have been around and who are quite bullish on crypto generally, and even they look at the Kodak thing and say “we’re very wary of this, we don’t know who’s running it, we’re not familiar with them, we haven’t seen them before.”

KODAKCoin Began as IP Troll-Backed Cryptocurrency for Paparazzi

  • WENN Digital is a newly formed company with origins as a German-based IP troll named RYDE GmbH (“Ryde”).10 Descriptions of the KODAKOne project mirror Ryde’s suspect business model; a “FREE image audit!” is proffered and, in the event copyright infringement is found, is followed with offers to bill you at a rate lower than what it would cost to settle a potential legal case.
  • News reports suggest that as recently as 6 days prior to announcing its partnership with Kodak, Ryde/WENN Digital was trying to launch Ryde Coin, a cryptocurrency designed to “benefit the community of countless paparazzi and media conglomerates with whom we do business” – a departure from the lofty language in Kodak’s press release which describes the platform’s goal of “empowering photographers” and “democratiz[ing] photography.” When Ryde Coin got no traction, WENN turned to Kodak.

See the full report below.